Japan facts of the day (Edward Hugh is bearish on Abenomics)

…roughly half of the current inflation in consumer products is due to the dramatic drop in the value of the yen. The drop has sharply inflated the costs of imports, especially energy imports, and these have partly been passed on to consumers. While many consumers in developed countries have been benefiting from lower energy costs, in Japan the costs of liquid natural gas — now a main source of power generation — were up 17% over a year earlier. In addition, “the Japanese also saw sharp rises in prices of foreign-made home electronics, which they increasingly import: Prices of washing machines were up 13%, while prices of audio equipment and refrigerators both rose 16%”.

Even the 0.7% annual rise in core-core inflation isn’t all it seems to be, since some 40% of the increase is accounted for by a one-off rise last year in charges for accident insurance and public services. The key point to grasp in all this is that the rise is due to what we could call “cost push” rather than “demand pull”. As Takeshi Minami, chief economist at the Norinchukin Research Institute put it,“Those increases had little to do with demand and supply.”

There is this bit too:

In the words of former Bank of Japan governor Masaaki Shirakawa, “Seemingly, there would be no linkage between demography and deflation. But it may not be the case. A cross-country comparison among advanced economies reveals intriguing evidence: Over the decade of the 2000s, the population growth rate and inflation correlate positively across 24 advanced economies. That finding shows a sharp contrast with the recently waning correlation between money growth and inflation.”

There is no actual evidence this is happening. Just speculation by the left because they wish that student loans would cripple the rest of the economy in order to make a statement. A degree in a STEM major is well worth the money http://business.time.com/2014/02/26/student-loans-are-ruining-your-life-now-theyre-ruining-the-economy-too/ A trillion dollars in debt isn’t hurting me. Other data shows that the average debt per graduate is only $23,000 , or about the same as a new car. But unlike a car, the value of an education keeps appreciating .The left has been blaming everyone but themselves for tuition going up or for not finding a good job. Student loans make the govt. $40 billion a year in profit. We need more of them.

What percentage of the human population has the intellect to succeed in a rigorous STEM college program? 5%? 10%?

What does that mean for the non-STEM folks?

Yes, STEM and the Bay Area are doing great. Same is true for the upper slices of NYC, DC and Boston. But the majority of people are moving sideways or backwards and that will only accelerate as the robots and AI take over. People won’t quietly sit still as they are pushed into poverty and debt.

For a lot of them, it means they shouldn’t go to college at all. A degree in English or Fill-in-the-blank Studies that costs you $100k is easily a net negative.

These folks are failing at life because they have never been held responsible for anything. They have been told they are special, oh so special, and given ribbons for participation, and had their homework done by mom and dad. Is it any wonder they’re incapable of getting a science degree?

“A degree in English or Fill-in-the-blank Studies that costs you $100k is easily a net negative.”

I think that’s quite obvious to everyone. What’s less obvious and more relevant is that accumulating $25K in debt over 4 years and then getting a job you didn’t really need the degree for in the first case is far more expensive than most people realize.

The person in question for went $75K+ in earnings. Add to that the accumulated student debt and the young worker is roughly $100K behind the curve. Plus being 4 years less experienced than he could have been. That’s a decision that will probably compound to well over $500K in lost net worth over a working life time.

College has become more of an extended adolescence for a large part of our young than a place to acquire a necessary skill.

“getting a job you didn’t really need the degree for in the first case”

Due to the shitty labor market you cannot get any white collar job w/out a college degree. Even something basic – like customer service – will require a college degree because there are that many college graduates out of work who would be happy to land a $12/hour customer service gig.

Contemplation 1:
Suppose middle aged Japanese had a mechanism to buy all future consumption for their lifetimes (shoes, food, etc.) and store it all in a perfected container. Such that, they do not actually need to spend any money to buy anything to fulfill any want for the rest of their lives. Is any sort of monetary stimulus, or fiscal stimulus, actually going to have any useful effect in such a circumstance?
Riddle – can you prove that the current real world circumstance is actually different from this far fetched one

Contemplation 2:
Why use such convoluted transmission mechanisms as interest rates, money supply, and so on. Indeed, why not skip even government make work. Instead, print money and give it directly to citizens. At a rate a which is promised to never decline, but may be flat. Point being to force fiat money directly into the hands of consumers. In an ideal world, it would appear as convienent sized currency which teleports into the consumers hand any time they appear to be contemplating purchasing something. In the real world it would look like a kind of “assured income” or “social safety net security”.

The CB could print and give to citizens while monitoring inflation. If inflation is too high no printing, if too low then they print. The CB balance sheet could be preserved by recognizing printed money as equity.

this area of economic “thought” is a great example of why academia is a worthless fraud (outside of pure science). When will academia admit that growth in the USA is for the most part dependent on immigration?
Mass immigration of third worlders that fragment the unity of the populace, thus weakening the expression of common, shared interests, thus making it harder for the populace to hold accountable its elected representatives.

Multiculturalism, white race guilt, affirmative action is the lubricant that the corporations (and their handmaidens in academia, media and gov’t) use to help cram millions of immigrants and their kids into american neighborhoods and workplaces.

Multiculturalism Uber Alles! GDP uber alles!

Thousands of worthless economics papers are written in america every year that talk about growth. Find me ONE that talks about this phenomenon in plain language.

And yet academia and the corporate media portray this ‘growth’ as something desirable. It’s not! It is ruinous.

America is being used as a livestock operation. The more immigrants (fertile, prolific immigrants) are crammed into america, the higher the ‘growth.’ The growth of a livestock yard. Just down the street, the slaughterhouse….

Academia is a fraud, and the above speaks to how it is a fraud. In particular, economics and the social sciences and humanities are a fraud.

The reason japan is experiencing low growth? The people are united there and thus have a higher degree of control over their gov’t. So therefore the corporations are not able to cram more human livestock into the pen.
Good for the Japanese!

A good article since it actually gets the JP Debt-to-GDP ratio correct, as it shows the “Net” ratio, not just the gross which is over 220%. With the “net” ratio it’s at a less scary 140%. BTW England back before the Industrial Revolution had a ratio of over 200% and over the course of the 19th century actually paid the debt all back to almost a zero ratio, so there’s hope for Japan, and did the same thing after WWII, but with the Industrial Revolution and with post WWII reconstruction helping them out, respectively.

“BTW England back before the Industrial Revolution had a ratio of over 200% and over the course of the 19th century actually paid the debt all back to almost a zero ratio, ”

Well, sure if Japan or the industrial world could reasonably expect to see the kind of population growth that England saw during that period of time with a simultaneous expansion of the per capita standard of living, then those levels of debt wouldn’t matter.

But does anyone really expect Japan’s population to double over the next 50 years?

Masaaki Shirakawa said “Seemingly, there would be no linkage between demography and deflation. But it may not be the case.”

I’m not an economist, but I would have thought that a country with a decreasing population would find itself with more resources such as houses or roads and fewer people. So asset prices, at least, would fall. Wouldn’t most other prices follow them down, on the whole?

I think that Japan is the only country with a peacetime population decline. So it is rather unprecedented. If your country experiences population decline due to war it probably experiences inflation too, though you may be right about Japan’s deflation and depopulation.

“In the words of former Bank of Japan governor Masaaki Shirakawa, “Seemingly, there would be no linkage between demography and deflation. But it may not be the case. A cross-country comparison among advanced economies reveals intriguing evidence: Over the decade of the 2000s, the population growth rate and inflation correlate positively across 24 advanced economies.”

The paper finds no significant correlation for the same group of nations in the 1990s. Moreover the paper points out in a footnote that:

“Another cross-country inspection based on a broader sample, including developing countries, does not
detect positive correlation between inflation and population growth in the 2000s and in earlier periods
likewise.”

The group of nations are “24 countries where the data are available among those that joined the OECD by the 1990s.” Twenty-five nations joined the OECD by the 1990s and Turkey was evidently dropped for being an outlier in inflation in the 2000s. Although the OECD doesn’t have the GDP implicit price deflator for all of the OECD members going back to 1990, the missing data can be found at the IMF or AMECO for all of the missing nations except Estonia and Slovakia. Furthermore, although Chile didn’t join the OECD until 2010, the OECD has all the necessary data so its not clear why Chile was excluded. Redoing the OLS analysis on the group of 32 reveals that in addition to Turkey being an outlier in inflation, Japan is an outlier with respect to working-age (15-64) population growth in the 2000s. The regression of the average rate of change in the GDP deflator on the average rate of change in working age population during the 2000s for the remaining 30 nations shows there is no statistically significant relationship.

Back in September I did a fairly exhaustive analysis of the relationship between labor force growth and inflation, the results of which are reported here:

I combined civilian labor force data from the OECD with CPI from AMECO for a group of 26 OECD nations, and computed 5-year compounded average civilian labor force growth rates and CPI inflation rates. The time periods ran from 1960-65 through 2007-12 with the exception of Korea which started with 1967-72. I regressed the average CPI inflation rates upon the average labor force growth rates. Fifteen of the 26 were statistically significant, and all at the 1% level with the exception of Poland which was at the 10% significance level. The average civilian labor force growth rate and average CPI inflation rate were positively correlated in Canada, Denmark, Finland, Greece, Iceland, Italy, Korea, New Zealand, Norway, the U.S. and Japan and negatively correlated in Spain, Luxembourg, the Netherlands and Poland.

Next I conducted Granger causality tests using the Toda and Yamamato method on the level data over 1960-2012 (except for Korea which was over 1967-2012) for the 15 countries which had statistically significant correlations.

So out of the 26 countries I looked at, fifteen have a significant correlation between average civilian labor force growth and average CPI inflation with eleven of the fifteen having a positive correlation. Of the eleven with positive correlation six demonstrate Granger causality with three showing one way causality from civilian labor force to CPI and three showing one way causality from CPI to civilian labor force. Of the four with negative correlation one demonstrates Granger causality from civilian labor force to CPI.

Only three countries (Japan, Korea and Finland) out of the 26 support the kind of story Shirakawa is trying to tell.

“But it’s worse, the monetary expansion has driven down the value of the yen but in the context of the second arrow – a double digit fiscal deficit – this drop in value is leading to a growing not a declining trade deficit. The FT’s Tokyo bureau chief, Jonathan Soble, has an enlightening recent piece on this…”

Although Japanese nominal exports have surged by 15.2% between 2012Q4 and 2013Q3, nominal imports are up by even more, or by 16.5%:

Devaluation improves a country’s trade balance only if the Marshall-Lerner condition on trade elasticities holds, and research shows that they’re not met in the majority of cases, either past or present:

That’s not to say that currency devaluation isn’t beneficial, of course it is, but the benefit flows primarily from increased domestic demand. Here is a study of the competitive devaluations of the Great Depression by Barry Eichengreen and Douglas Irwin:

The Great Depression is a particularly important historical example because then, as now, most of the advanced world was up against the zero lower bound in policy interest rates.

An examination of Figure 4 on page 48 reveals that the only countries that experienced import growth from 1928 to 1935 (the UK, Japan, Sweden and Norway) were members of the sterling block that devalued early (1931). In most of these countries net exports actually declined over the period because imports rose more than exports.

The order of recovery from the Great Depression follows the order in which they abandoned the gold standard perfectly:

However, since imports were already substantially greater than exports, the nominal deficit actually increased by 55.4%.

Japan’s original ryōteki kin’yū kanwa (QE) was officially announced in March 2001 and concluded in March 2006. The following is a graph of the BOJ’s estimate of Japan’s real effective exchange rate which is trade weighted with respect to 16 different currencies and takes into account their relative inflation rates:

The real effective exchange rate fell from 116.25 in February 2001 to 91.09 by March 2006, when the BOJ announced the completion of QE, a decline of 21.6%.

Exports rose from 10.2% of nominal GDP in 2001Q4 to 19.3% of GDP in 2008Q3. Imports rose from 9.4% of GDP in 2001Q4 to 19.5% of GDP in 2008Q3. From 2002Q1 to 2008Q1 real (adjusted by the GDP implicit price deflator) grew at an average annual rate of 11.0%. Real imports grew at an average annual rate of 12.1%.

So there was boom in both exports and imports. But imports grew faster than exports, and net exports actually moved from surplus (0.8% of GDP) to deficit (-0.2% of GDP) between 2001Q4 and 2008Q3:

It’s very telling that today the only major currency area up against the zero lower bound in interest rates that hasn’t done QE (the Euro Area) is also the only major currency zone where the trade balance has improved substantially since 2009, going from 0.6% of GDP in 2009Q1 to 3.3% of GDP in 2013Q3:

“Even the 0.7% annual rise in core-core inflation isn’t all it seems to be, since some 40% of the increase is accounted for by a one-off rise last year in charges for accident insurance and public services. The key point to grasp in all this is that the rise is due to what we could call “cost push” rather than “demand pull”. As Takeshi Minami, chief economist at the Norinchukin Research Institute put it,“Those increases had little to do with demand and supply.””

This was reported in the Wall Street Journal (and only in the WSJ). But I’ve researched this online six ways to Sunday and I have been completely unable to verify that “40% of the increase is accounted for by a one-off rise last year in charges for accident insurance and public services.”

But even if it is true, consider the following. Forty percent of 0.7 is about 0.3. Even a 0.4% increase in core-core CPI is the largest annual increase in Japan since 1998.

Moreover year on year core-core CPI rose from (-0.9%) in February to 0.7% in December 2013, or an acceleration of 1.6 points. Excluding the several months following the two point increase in Japan’s consumption tax in April 1997, that’s the fastest acceleration in core-core CPI inflation in any ten month period since 1989. And that is still true even if you subtract 0.3 points off of that increase because of a “one-off rise last year in charges for accident insurance and public services.”

Now, of course I don’t happen to think Inflation Targeting (IT) is a good idea, and I certainly don’t think inflation is the best way to measure the effectiveness of monetary policy. But the BOJ has set itself a goal of raising CPI inflation to 2%, and any way you slice it or dice it, they have made a lot of progress towards meeting that goal in a very short period of time.

“And what if Japan’s deflation is a product of this process, rather than being a simple liquidity trap? In the words of former Bank of Japan governor Masaaki Shirakawa, “Seemingly, there would be no linkage between demography and deflation. But it may not be the case. A cross-country comparison among advanced economies reveals intriguing evidence: Over the decade of the 2000s, the population growth rate and inflation correlate positively across 24 advanced economies. That finding shows a sharp contrast with the recently waning correlation between money growth and inflation.””

The claim in the very last sentence originally comes from the following paper:

Shirakawa is referring specifically to Figure 2. “Adjusted money growth” is defined as broad money supply growth minus RGDP growth. Inflation is measured using the GDP implicit price deflator. The correlation between money growth and inflation dropped in the US, Japan, the UK and France between the period 1970-94 and the period 1995-2009.

But note that Shirakawa seems to imply that this is also true for all of the 24 nations mentioned previously. However Figure 1 shows that the cross-sectional correlation between money growth and inflation for a larger group of nations was higher in the 1990s and 2000s than it was in the 1970s and 1980s.

Also, consider the following about the four nations referred to in Figure 2. All four are currently at or near the zero lower bound in interest rates, and all but France have been in ZIRP since at least 2009. Since the velocity of broad money is very low in countries in ZIRP, it would be very surprising if the correlation between “adjusted money growth” and inflation in those four countries didn’t drop in the period immediately preceding their zero lower bound episodes.

Incidentally Masaaki Shirakawa was the previous Governor of the BOJ (April 2008 to March 2013) so he may have an axe to grind. But my impression from having read some of his speeches, such as this one:

Instead of posting a thousands of words, how about just post your conclusion, followed by a few sentences of supporting evidence and then a link to the details. I think more people would actually read it, if that were the case.

In 1951, ahead of the peaceful liberation of Tibet, the U.S. plotted and supported the reactionary forces of the Tibetan upper classes to resist the People’s Liberation Army to liberate Tibet. While its plot to help the Dalai Lama flee Tibet failed, it said.